Intermediate Accounting Test 2 chapter 5

Internal control for cash disbursements

-all disbursements except for small disbursements should be made by check -only authorized persons should sign checks -all expenditures should be authorized before a check is prepared

Five Steps for Recognizing Revenue

1. Identify the contract between a seller and a customer 2. identify the performance obligations, which are promises by the seller to transfer goods or services to a customer 3. Determine the Transaction Price 4. Allocate the transaction price 5. The seller recognized revenue when it satisfies a performance obligation by transferring the promised good or service

The following are viewed as separate performance obligations

Extended warranties and An option granted to the customer to receive additional goods or services at no cost or at a discount

Which of the following is considered a performance obligation? Up-front registration fees for a gym membership Extended warranties on electronic products Quality-assurance warranties on electronic products A processing fee to obtain a bank loan

Extended warranties on electronic products

Which of the following does not apply to a seller who is a principal? A.Has control over goods or services B. Primarily responsible for providing goods or services to customer C. Exposed to risks associated with holding inventory D. Primary performance obligation is to facilitate the transfer of goods or services

Primary performance obligation is to facilitate the transfer of goods or services

For contracts that include more than one separate performance obligation: a. Revenue is recorded over time at the fair value of each performance obligation. b. Revenue is recognized in the amount of the contract price on the date the last separate performance obligation is satisfied. c. The contract price is allocated to each performance obligation in proportion to the obligations' stand-alone selling prices. D. Revenue is recognized in the amount of the contract price on the date the contract is signed.

The contract price is allocated to each performance obligation in proportion to the obligations' stand-alone selling prices.

Expected cost plus margin approach

The seller estimates the costs of satisfying a performance obligation and then adds an appropriate profit margin.

Allowance for Uncollectible accounts is

a contra account

Rothbart Manufacturing agrees to manufacture bumper cars for 12 Banners Amusement Parks. Under the terms of the contract, 12 Banners will pay Rothbart a total of $60,000, and 12 Banners can cancel the contract if it so chooses but must pay Rothbart for work completed. Rothbart believes that, if 12 Banners cancelled the contract, Rothbart could sell the bumper cars to another amusement park and still make a profit. The manufacturing contract is expected to last six months, and as of December 31, 2018, the job is 80% complete. How much revenue should Rothbart recognize in 2018 for this contract? a. $0 b. $12,000 c. $48,000 d. $60,000

a. $0

Which of the following is not an indicator that the customer is likely to have control over a good? a. Asset warehoused by seller-affiliated third party b. Accepted the asset c. Legal title to the asset d. Physical possession of the asset

a. Asset warehoused by seller-affiliated third party

Which of the following is one of the steps for recognizing revenue? a. Identify the performance obligations of the contract. b. Determine whether bad debts can be reasonably estimated. c. Estimate the total transaction price of the contract based on fair value. d. Allocate all revenue to the performance obligation with the largest stand-alone selling price.

a. Identify the performance obligations of the contract.

Under which of the following circumstances is it most appropriate to use the residual method to estimate stand-alone selling prices? a. The seller hasn't previously sold the product and hasn't determined a price for it. b. The seller provides the product bundled with other goods or services. c. The seller does not have competitors from which to observe market prices of similar products. d. The seller is unable to accurately estimate variable consideration associated with the contract.

a. The seller hasn't previously sold the product and hasn't determined a price for it.

What is the effect of bad debts on revenue recognition? a. The seller must believe it is probable it will collect the amounts it is entitled to collect. b. Bad debts must be of a remote likelihood in order to recognize revenue. c. Bad debts are deducted from revenue to calculate net revenue on the income statement, similar to sales returns. d. Bad debts are ignored when determining whether to recognize revenue, but recognized as an expense on the income statement.

a. The seller must believe it is probable it will collect the amounts it is entitled to collect.

GAAP-Overdrafts should be treated

as a liability

IFRS-Allows overdrafts to be offset Liabilities can be offset against other cash accounts and stated

at their net value on the balance sheet

Mary signed up and paid $1200 for a 6 month ceramics course on June 1st with Choplet Ceramics. As of August 1st, Choplet's accounting records would indicate: a. $400 of revenue, $800 of accounts receivable b. $400 of revenue, $800 of deferred revenue c. $1,200 of revenue, $1,200 of cash d. $800 of revenue, $400 of accounts receivable

b. $400 of revenue, $800 of deferred revenue

On November 1, 2018, Taylor signed a one-year contract to provide handyman services on an as-needed basis to King Associates, with the contract to start immediately. King agreed to pay Taylor $4,800 for the one-year period. Taylor is confident that King will pay that amount, but payment is not scheduled to occur until 2019. Taylor should recognize revenue in 2018 in the amount of a. $0 b. $800 c. $2,400 d. $4,800

b. $800

Which of the following is not a performance obligation? a. A good that the seller could sell separately and that is separately identifiable from other goods or services in the contract. b. A right of return. c. An option for a customer to purchase goods under terms that are more advantageous than those enjoyed by other customers.

b. A right of return.

Which one of the following is not one of the five steps for recognizing revenue? a. Identify the contract with a customer b. Recognize revenue when all the performance obligations have been satisfied c. Identify the separate performance obligation(s) in the contract d. Allocate the transaction price to the separate performance obligations

b. Recognize revenue when all the performance obligations have been satisfied

A contract does not exist for purposes of applying the revenue recognition principle in all of the following cases except for when: a. The seller believes it is not probable that it will collect the amount it's entitled to receive under the contract. b. The seller and buyer did not sign a formalized written contract. c. The seller and buyer can terminate the contract without penalty and neither has performed any obligations under the contract. d. The seller believes it is highly likely but not certain that the buyer will agree to the terms of the contract.

b. The seller and buyer did not sign a formalized written contract.

Under IFRS, revenue for a product sale should occur when: a) Inventory production is complete. b) Warranty fulfillment is viewed as unlikely. c) The seller has transferred to the buyer the risks and rewards of ownership and doesn't effectively manage or control the goods. d) The buyer has paid a preponderance of installment amounts due.

c) The seller has transferred to the buyer the risks and rewards of ownership and doesn't effectively manage or control the goods.

Minarski Electronics sells computers and provides hardware maintenance services. On April 1st, Minarski sold a package deal containing a computer and a one-year unlimited maintenance/repair service for the computer at a bundle price of $1,000. If sold separately, the computer costs $840 and the one-year unlimited maintenance/repair service costs $360. How much revenue does Minarski Electronics recognize for the month ended April 30th, assuming that revenue is accrued monthly? a. $1,000 b. $870 c. $725 d. $30

c. $725

Which of the following applies to a seller who is an agent? A.Warehouses inventory B. Liable for the delivery of goods or services to the client c. Charges a commission for each transaction d. Records revenue at full transaction price

c. Charges a commission for each transaction

Arizona Desert Homes (ADH) constructed a new subdivision during 2017 and 2018 under contract with Cactus Development Co. Relevant data Contract amount Cost: 2017 are summarized below: $3,000,000 1,200,000 600,000 800,000 400,000 1,500,000 a. Accounts receivable Revenue from long-term contracts b. Accounts receivable Gross profit Revenue from long-term contracts c. Construction in progress Cost of construction Revenue from long-term contracts d. Accounts receivable Billings in excess of cost Revenue for long-term contracts 1,500,000 1,500,000 2,300,000 800,000 1,500,000 2,000,000 1,800,000 Gross profit: Contract billings: 2018 2017 2018 2017 2018 ADH recognizes revenue over time with respect to these contracts. 171. What would be the journal entry made in 2017 to record revenue? 800,000 1,200,000 1,500,000 300,000

c. Construction in progress Cost of construction Revenue from long-term contracts

Consider the following three scenarios: I. ABC Lawncare performed lawn maintenance services for Drake Inc. on June 1st, and received payment of $500 for those services. II. On June 1st, Melly Corp received payment for 100 pounds of raw material to be delivered to Drake Inc. in 6 months III. Lodo, LLC collected cash on June 1st for services rendered on May 1st. Given these scenarios, revenue can not be recognized on June 1st for a. I,II b. I only c. II, III only d. III only

c. II, III only

Which of the following is not a characteristic of a distinct good or service? a. I.T can be used on its own or in combination with other goods or services the seller could obtain elsewhere b. I.T is not highly dependent on other goods or services in the contract c. I.T has a stand-alone selling price d. I.T is not interrelated with other goods or services in the contract

c. It has a stand-alone selling price

On June 1st, Lucy & Bros received an order for 500 cupcakes. Lucy delivered the cupcakes to the client on June 25th. A $50 deposit was received on June 5th and the remaining $450 was paid on June 30th. Lucy likely would recognize revenue on a. June 1st b. June 5th c. June 25th d. June 30th

c. June 25th

Binz Company provides cleaning services and sells garbage bins to office clients. On June 1st, Binz delivered 100 garbage bins to a client, and also entered into a 5-year contract for Binz to provide cleaning services to that client. Which of the following is most likely to be true? a. Revenue for the garbage bins and the cleaning services must be recognized on June 1st. b. Revenue for the garbage bins is recognized on June 1st and no revenue will be recognized for the cleaning services until the end of the 5th year. c. Revenue for the garbage bins is recognized on June 1st and revenue for the cleaning service is recognized over the 5 years as those services are performed. d. Binz Company should not recognize any revenue until the end of the 5th year.

c. Revenue for the garbage bins is recognized on June 1st and revenue for the cleaning service is recognized over the 5 years as those services are performed.

For a typical manufacturing company, the most common critical point for recognizing revenue is the date: a. An order is received. b. Production is completed. c. The product is delivered. d. Payment is received.

c. The product is delivered.

Which of the following is not an indicator that revenue can be recognized over time? a. The seller is enhancing an asset that the buyer controls as the service is performed. b. The customer consumes the benefit of the seller's work as the seller performs the service. c. The seller is creating an asset that has an alternative use to the seller, and the seller can receive payment for its progress even if the customer cancels the contract. d. None of these answer choices are correct.

c. The seller is creating an asset that has an alternative use to the seller, and the seller can receive payment for its progress even if the customer cancels the contract.

Stayman Associates has sold a good to a buyer and wants to recognize revenue. Which of the following is an indicator that control of a good has passed from Stayman to the buyer? a. Buyer has scheduled delivery. b. Buyer has a strong credit history, such that bad debts are reasonably estimable. c. Buyer has not scheduled delivery. d. Buyer has assumed the risk and rewards of ownership.

d. Buyer has assumed the risk and rewards of ownership.

Companies recognize revenue only when a. A contract is reasonably likely to exist b. A performance obligation is designated in a written contract c. A written contract is in place and payment is variable d. Control over goods or services has been transferred from the seller to the customer

d. Control over goods or services has been transferred from the seller to the customer

Which of the following is not one of the five steps for recognizing revenue? a. Recognize revenue when (or as) each performance obligation is satisfied. b.Determine the transaction price. c. Allocate the transaction price to each performance obligation. d. Estimate variable consideration.

d. Estimate variable consideration.

Revenue likely is recognized over time for all the following arrangements except for a. Bank earning interest on a long term loan b. Construction of a building c. Providing a two-year gym membership d. Manufacturing generally stocked items ordered by a favored customer

d. Manufacturing generally stocked items ordered by a favored customer

On February 1st, H&B Bank originated a loan for $50,000 at an interest rate of 7.2%. On March 15th, an interest payment of $300 was received. Which of the following best describes when interest revenue should be recognized? a. At a point in time (February 1st) b. At a point in time (March 15th) c. At a point in time (March 31st) d. Over time

d. Over time

Goods or services are capable of being distinct if: a. The seller regularly sells the good or service separately. b. A buyer could use the good or service on its own. c. A buyer could use the good or service in combination with goods or services the buyer could obtain elsewhere. d. The seller regularly sells the good or service separately, or the buyer could use the good or service on its own, or the buyer could use the good or service in combination with goods or services the buyer could obtain elsewhere.

d. The seller regularly sells the good or service separately, or the buyer could use the good or service on its own, or the buyer could use the good or service in combination with goods or services the buyer could obtain elsewhere.

To record the write off of bad debt you would

debit the Allowance for bad debts and credit the accounts receivable account

Pledging of accounts receivable as collateral for a loan must be

disclosed in the notes to the financial statements

If the company is an agent

it records as revenue only the commission it receives on the transaction

Assets and liabilities should be stated

separate;y on the balance sheet

If a factoring arrangement is made without recourse

the buyer can't ask the seller for more money if the receivables prove to be uncollectible. Therefore, the buyer assumes the risk of bad debts

If a contract contains multiple performance obligations

the timing of revenue recognition is determined separately for each performance obligation depending on when that performance obligation is satisfied

The seller recognizes revenue over a period of time if:

• Customer consumes benefit as work performed, • Customer controls asset as it's created, or • Seller is creating an asset that has no alternative use to the seller and the seller has right to receive payment for work completed